Don't Buy The Hain Celestial Group

Summary

• The Hain Celestial Group doesn't have any competitive advantage.
• It is formed by a lot of very small brands.
• The company has been selling itself to pay down debt.
• It doesn't pay a dividend, and there's no dividend in sight.

Investment Thesis

The Hain Celestial Group (NASDAQ:HAIN) is a consumer packaged goods company living a bad moment. Revenues have been decreasing since the beginning of 2017, and it has nowhere to go if management does nothing to make changes to turn things around. It doesn't pay a dividend, and won't do so at least for a long, long time. Investors considering buying the stock should avoid to do it.

In this article, I am going to explain why this stock is a sell, and why any investor considering investing in Hain Celestial should look somewhere else.

A Brief Overview Of The Company

Image Source: Food Bussiness News

The Hain Celestial Group is a fast-moving consumer goods company whose purpose is to become the leader in the healthy and organic food industry. Founded in 1993, it sells products in the healthy category of the shelves, such as Better Bean, Health Valley, and Earth's Best. These products correctly respond to recent consumer trends and will most likely find a bigger market size year after year.

Currently, the stock trades at a price of $30.75, which represents a 55.77% decline from its all-time high of $69.53 on July 16, 2015. Certainly, I consider the current price as a good entry point, especially for long-term investors. What actually makes me reconsider my position is trying to find the investment philosophy that would make an investor jump in.

Data by YCharts

A Major Acquirer Now Selling Itself

Image Source: ESM Magazine

The Hain Celestial Group has been a major acquirer of small healthy brands of packaged foods. All of these acquisitions showed a clear vision of the company's commitment to provide consumers with A Healthier Way of Life. Through its history since its foundation in 1993, it has been systematically acquiring brands, forming what we know today as Hain Celestial. Everything seemed to go smoothly until its results began to be disappointing. After all, the M&A strategy is not that easy.

Since the beginning of 2019, The Hain Celestial Group has been experiencing many divestitures in an attempt to reduce its relatively high load of debt. In February 2019, it sold Plainville Farms to Plainville Brands LLC. It also completed the sale of WestSoy in May 2019, an organic brand that produced tofu, seitan and tempeh (fermented soy) to Franklin Farms.

In July 2019, Hain Celestial finished the sale of Hain Pure Protein Corporation, which included the FreeBird and Empire Kosher businesses, to Aterian Investment Partners for $80M. In August 2019, it also announced the sale of Tilda to Ebro Foods (OTC:EBRPF) (OTC:EBRPY) for $342M in cash. A bad move, considering Tilda was acquired by Hain Celestial for $357M in January 2014 ($15M more expensive of what it got from the recent sale), and we are not putting inflation into the equation. In October 2019, it completed the sale of Arrowhead Mills and SunSpire brands to Hometown Food Company for $15 million. More recently, the company sold its Casbah prepared healthy foods brand to U.S. Durum and Europe's Best frozen foods and vegetables brand to Nature's Touch Frozen Foods.

Since the first divestiture, there hasn't been any acquisition or launch. The fact that a company systematically sells itself to pay down debt and interest expenses gives us a red flag about it and tells investors they should avoid the stock, especially one without a long-term track record of success. When I invest in a company, I like to see where it is heading to, looking at the news about the products they are launching, and read consumer reviews as soon as they are available in the direct-to-consumer channels. Consequently, I want to see these new launches translating into net sales growth, raising revenues, and increasing free cash flows. When I look at Hain Celestial, I only see divestitures and declining net sales, and not a single reason to buy. If I had to consider one reason to jump in, I would choose the fact that it operates in a fast-growing market segment, but that is not enough reason to do it as long as much better options are available everywhere else.

Not Actually A Global Powerhouse

Image Source: 10-Q Filing

If we look at the chart above, we can see the company's net sales by region are very concentrated in just two countries (United States and United Kingdom), while only 23.35% of net sales come from the rest of the world, including the rest of Europe.

It is true that the "all other" countries' net sales increased by 19.70% YoY in the last quarter, showing a slight success regarding exports, but the overall quarter saw a 1.09% decrease YoY in net sales. The trend when it comes to exports is good and gives us a hint about the company's capacity to expand its business abroad, but declining overall net sales in the two countries where their brands are more established is a sign that consumer's loyalty is lousy. Lousy consumer loyalty is usually linked to an inability to meet consumer expectations, and that is not a way to build moats over the long run.

Numbers Are Just Getting Worse

Image Source: YCharts

As we can see, The Hain Celestial Group is a long-term stock issuer. In the last 25 years, we have not seen any decrease in outstanding shares, so buybacks are basically non-existent. Rather than decreasing, we can see how, every single year, the outstanding shares just increased more in quantity, together with long-term debt. The reason behind that is the fact that they have been trying to grow through acquisitions by issuing shares and borrowing debt. Increasing outstanding shares are not a bad sign itself. In fact, they are very advantageous if the company use resources resulting from stock issuance for growth, especially when there's no dividend spending, but now that the company is divesting the brands they once acquired by issuing new stock, I can't really see a straight line in the company's strategy. In short, it seems they are going backwards without a rear-view mirror.

Q3 2020 Results

Image Source: Ycharts

The Q3 '20 results shown a 1.10% increase YoY in net sales, from $547M in 2019 to $553M this year. The free cash flow stood at $28.86M, a significant improvement from a negative $-6.5M the same quarter last year, although not an impressive number compared to other quarters. Revenue decreased from $553.30M to $547.26M, a 1.09% decrease YoY. Gross profit saw better figures, giving us an increase of 16.95% YoY from $113.20M to $132.39M. The total interest expenses for the quarter were $4.04M, which is actually not so high. Overall, the quarter's results have been positive, but if we look at the big picture, we see that free cash flow and revenue have been decreasing since the beginning of 2017. The main factor behind those numbers is a consistent decline in net sales that went from $2,457M in 2018 to $2,302M in 2019, a 6.31% decline YoY. So, although the quarter was a good one for Hain Celestial, it says nothing about the overall scheme of things.

Considering these numbers, and specifically the longer-term figures, I would be very interested in knowing if it is a consolidated trend, or is it simply the result of their brand restructuring process. Looking at their 10-K annual reports, I found the biggest red flag, the one that definitely convinced me that this stock is not worth holding (and much less buying), and it is the fact that the company's net sales have been decreasing every single year since 2016, in a total decline of 20.21%.

Year	2019	2018	2017	2016	2015
Net Sales	$2,302M	$2,457M	$2,853	$2,885M	$2,609M

Click to enlarge

The conclusion I draw from these divestments and this trend is that net sales will continue to decline this year, further damaging shareholders' value, especially because the company is using the money to pay down debt, instead of investing it in brands with a higher organic growth rate.

Key Risks To Consider

The Hain Celestial Group has been divesting some of its brands recently and could continue to do so in the near future as debt is still too high, and this will obviously hurt its net sales and gross profits negatively. If the company doesn't achieve growth through an increase in net sales from its brands, it could have to continue the divesting path until finally be forced to merge itself as a whole to a bigger company at a bargain price.

It doesn't have any moat and their brands are very small and mostly not known by consumers. A company without a moat can't sell their goods at a premium price and is doomed to have lower gross profit margins compared to its peers, as we show in the chart below.

Image Source: Ycharts

I think the organic food sector has good growth prospects, and certainly, most big consumer packaged goods companies are updating their products to look more like the products that Hain Celestial sells, but it doesn't mean any company operating in a growing economic sector will succeed. Indeed, this represents a major challenge, since bigger companies have vastly more resources to invest in R&D, and their innovation costs are lower, as they often just need to make adjustments to the brands they already own in their portfolio, while smaller companies like Hain Celestial often have to acquire small brands and do their best efforts to achieve organic growth.

Despite the good reputation of its products for being organic and highly healthy, the company has been the protagonist of a controversy that hurt consumer confidence since 2013. In 2013, Hain Celestial was sued, accused of falsely labeling its Celestial Seasoning brand as organic. Later, in 2015, it was forced to pay consumers in compensation for false labeling, as some brands failed to meet the minimum requirements to be considered as organic. While this news are already old, they should warn us that some of the company's products could actually be not that organic or healthy. Since the lawsuit, the company has been experiencing constant damage in the balance sheet health, negatively impacting the share price. No more lawsuits regarding false labeling have taken place since then, which makes me consider that the possibility of new false labeling scandals is just something to look askance.

Conclusions

The Hain Celestial Group is a stock to avoid. It doesn't have any moat and is composed of a lot of very small brands, mostly sold in the United States and United Kingdom. For the company to improve its prospects, it should stop divestitures and improve its net sales through organic growth, while using its resources to pay down debt and invest in R&D or making wise acquisitions. Divesting the company to pay down debt will only keep the stock price sinking into perpetuity.

The stock doesn't have much to offer to investors. It may be a success story but is definitely not worth the risk. It doesn't pay a dividend, and won't pay it in the short-to-medium term, so there is nothing to collect while waiting for an eventual turnaround. There are much better options out there. If you are a long-term investor, you don't want to invest in this one.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.